Don’t worry, we can always lease Heathrow to the Russians…

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The headline is from Willem Buiter’s blog.

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

Buiten’s reasoning (in another post to his excellent blog) is:

A government should only nationalise a bank (let alone most of its banking sector) if it has the fiscal strength to support the bank (or its banking sector). If it does not have the fiscal resources, now and in the future, to restore the banks to solvency, a private sector insolvency problem is transformed into a government insolvency problem. On the whole, the consequences of state default are more serious for the residents of a country than the consequences of a private bank default.

If the banks in question have a large amount of foreign currency debt, maintaining government solvency when the government tries to make all the banks’ creditors whole, requires two distinct resource transfers: an internal fiscal transfer, through spending cuts or tax increases from the domestic private sector to the government, and an external transfer through a larger primary surplus in the balance of payments accounts. Such an external transfer generally requires a depreciation of the real exchange rate and a worsening of the country’s external terms of trade.

Questions for McCain

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Here’s what Joe Stiglitz would like to ask in tonight’s ‘debate’:

1. When the current bailout of Wall Street fails to turn around the economy and reinvigorate credit markets, will you propose another one? How large should it be? Henry Paulson and Ben Bernanke have said what is needed is a restoration of confidence in the economy. But won’t the failure of this bailout destroy confidence, with disastrous consequences — as happened in Indonesia and other East Asian countries when similar bailouts failed 10 years ago?

2. More than a million people have lost their homes in the past two years. A million more are expected to lose their homes in the next 12 months or so. Do you support a more direct program of relief for homeowners? The government pays more of the mortgage costs of rich homeowners, through larger tax deductions, than of poorer homeowners. What would you do to correct this injustice?

3. President Bush pushed tougher bankruptcy laws that were supposed to reduce bankruptcy and lower lending costs. But the new laws made it more difficult for ordinary Americans to discharge their debts, and encouraged reckless lending on the part of lenders, who thought they could more easily force poor borrowers to repay. Would you make any changes in the bankruptcy laws? Currently, it is more difficult to restructure a mortgage on a primary residence than other debts. Do you support bankruptcy reforms that would make it easier for people to stay in their homes?

Personally, I like to put these to Sarah Palin.

Vista, the “unqualified success”

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Since (we updated it), I’d also refer to Vista as an unqualified success. It doesn’t mean that people aren’t still picking on it, but we’ve sold 180 million copies, something like that, of Vista. The quality, the compatibility (and) particularly from the consumer market, the level of acceptance — I’d call it an unqualified success, over the last six months or so.

Steve Ballmer, in an interview. But what we really want to know — and what Microsoft knows but won’t divulge, thought they know the number — is how many of those Vista copies have been actually activated. I know lots of people who bought laptops with Vista but who paid for the ‘downgrade’ to XP. Each laptop counts as a Vista ‘sale’, but not as a copy in actual use.

Prius plug-in

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Hmmm… Here’s a supplier (based in California) who will adapt my Prius to recharge from the mains. $5,000 plus shipping and installation. Bet it voids the warranty. I think I’ll wait for Prius v2.0.

Markets down, online lingerie sales up

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There’s a silver lining in every cloud.

Froggybank.co.uk, an online shopping network of 180 websites, said it had analysed the spending habits of its half a million members for the past three months, only to discover that underwear sales, far from being pulled down by the economic crisis had risen two per cent. Or, in other words, when people think “credit crunch”, they think “pants!”

More on the Chinese backdoor in Skype

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From Technology Review…

Skype has previously acknowledged that its Chinese partner, TOM Online, blocks chat messages containing certain politically sensitive keywords. The new findings, however, reveal a level of surveillance that goes far beyond this.

Nart Villeneuve, a research fellow at the Citizen Lab at the University of Toronto’s Munk Centre for International Studies, uncovered the surveillance scheme by examining the behavior of the TOM-Skype client application. He used an application called Wireshark, which analyzes traffic sent over a computer network, to see what happens when different words are sent via chat using the software. Villeneuve discovered that an encrypted message was automatically sent by the client over the Internet when some words were entered. Following this encrypted packet across the Net, Villeneuve uncovered a directory of files on an open Web server. Not only was the directory publicly accessible, but the data within it could be unlocked using a password found in the same folder. Within these files were more than a million chat messages dating from August and September 2008.

Villeneuve used machine translation to convert the files he found from Chinese into English, and he analyzed the contents to determine likely trigger words. The list he came up with includes obscenities and politically sensitive words and phrases such as “Falun Gong,” “democracy,” and “Tibet.” But Villeneuve also found evidence that completely innocuous messages–one, for example, contained nothing more than a smiley face–were logged. This suggests that certain users were targeted for monitoring, he says.

$5,000 for your genome

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From Technology Review…

Starting next spring, a complete human-genome sequence can be ordered for just $5,000, thanks to a new sequencing service announced by Complete Genomics, a startup based in Mountain View, CA. The stunning price drop–sequencing currently costs approximately 20 times that amount–could completely change the way that human-genomics research is done and open up new possibilities in personalized medicine. Researchers say that a $5,000 genome would enable new studies to identify rare genetic variants linked to common diseases, and it could open up the sequencing market to diagnostic and pharmaceutical companies, making genome sequencing a routine part of clinical drug testing.

Complete Genomics, which has received $46 million in venture funding to date and has largely stayed under the radar, plans to launch with a bang and anticipates the capacity to sequence 1,000 genomes in 2009 and 20,000 in 2010. That would represent a massive jump: with a price tag of $100,000 to $1 million over the past two years, only a handful of human genomes have been sequenced to date.

Apart from anything else, this is an illustration of what Moore’s Law can do.

The incorporeal body politic in Merrion Street

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Mark Hennessy has an enthralling account of the frantic 24 hours in which the Irish government came up with its dubious wheeze for bailing out the country’s banks.

IRELAND’S top bankers do not usually play a supplicant’s role.

Sitting, however, in Taoiseach Brian Cowen’s oak-lined office shortly before midnight on Monday underneath a portrait of Éamon de Valera there was little doubt about how much trouble they were in.

The bankers uneasily waiting there were Eugene Sheehy and Dermot Gleeson, chief executive and chairman of Allied Irish Bank (AIB) respectively, and their two counterparts from Bank of Ireland, Brian Goggin and Richard Burrows.

Four hours earlier, following a disastrous pounding for Irish bank shares on the stock markets, the four had hurriedly sought a meeting with Cowen and Minister for Finance Brian Lenihan.

Having arrived at Government Buildings at 9.30pm, they were taken to the Sycamore Room, once so beloved of Charles J. Haughey, and left to wait, and wait. Nearby, Cowen was chairing another meeting, involving Central Bank governor John Hurley and the chief executive of the Financial Regulator, Pat Neary.

Two hours elapsed before the bankers, who had been left on their own, were called in before Cowen and Lenihan, who asked some questions, but mostly listened. The bankers’ message was not that Anglo Irish Bank was about to collapse; or that Irish Nationwide was on the brink, though both had cash shortages to face on Tuesday and Wednesday. Instead, it was that they themselves were facing crisis…

Hennessy claims that the option eventually chosen – to guarantee “the deposits, loans and obligations” of the six Irish banks – had “been circulating within the Department of Finance, the Central Bank and Government Buildings for over two weeks”.

So the government knew what was likely to happen.

There’s a good deal of Yes, Minister comedy in the story. For example, it was decided that the decision would be made via a virtual Cabinet meeting conducted by telephone. Apparently this is known in Irish constitutional parlance as an “incorporeal” meeting.

While a number of senior Ministers had already been put on notice, the Cabinet secretariat contacted the remainder, telling them to be ready for the “incorporeal” meeting between 1am and 2am. Even then, most Ministers were not told exactly of the decision’s scope. Willie O’Dea was woken shortly after 1am by his ringing mobile, but it had gone to voicemail by the time he got to it. The landline by his bed rang seconds later.

Green Party leader John Gormley had more knowledge than most of an imminent banking crisis but, up until then, the secretariat had failed to make contact with him because his mobile had run out of power. In the end, Irishtown Garda station was called, and they sent a garda to his Ringsend home to wake him and ask him to ring the Taoiseach’s office.

It’s gets better. The banks left out of the deal were furious.

The statement entered the public arena at 6.45am, causing consternation among the banks not immediately included along with the six Irish institutions. And the consternation made itself heard very, very quickly – and directly to the man next in line for the throne of England.

Furious at the news, Sir Fred “The Shred” Godwin, chief executive of Ulster Bank’s parent, Royal Bank of Scotland, called Prince Charles, as well as the British prime minister Gordon Brown, sources say.

Brown’s chancellor of the exchequer, Alastair Darling, quickly called Lenihan. “He was very unhappy, let’s put it that way,” said one closely involved in the night’s events. Demanding a reversal of the decision, Darling warned that money would flood out of British banks. Lenihan listened, but gave no succour and said he had to protect Ireland’s interests. Later, he called again.

Brown rang Cowen later. Though he expressed concern, he did not ask for the guarantee to be stopped, but he did urge Cowen to do something for UK bank subsidiaries operating here. Replying, Cowen, no doubt conscious of the lack of warning by London when it nationalised Northern Rock 12 months ago, said Ireland had to look after its own banks.

Hennessy also says that

“One senior banker turned up at the Department of Finance offices in Merrion Street without an appointment, demanding to see Lenihan. Sources say he declared: “You’re trying to screw us.”

Well, it made a nice change. The banks have been screwing the Irish consumer for decades.

UPDATE: European Union Competition Commissioner Neelie Kroes said today that the Irish Government’s plan to provide unlimited guarantees on deposits in Irish banks contravenes EU law.

Ms Kroes said there was a discriminatory element to unlimited guarantees on bank deposits and that she expected Ireland to modify its guarantee plans.

She also said she had received assurances from her contacts in Dublin that the Government intended to modify the proposal before presenting it to Cabinet early this week.

MEANWHILE… Frank McNally has been enthralled by the Second October Revolution. In the first one, you will recall, the workers took ownership of the means of production. In October 2008, Irish citizens took ownership of the means of losing money. “Certainly”, he writes,

“I find myself caught up in the new revolutionary fervour. As a taxpayer – and to use Bertie’s terminology – I now ‘have it in my mind’ that I own the AIB and Bank of Ireland. I don’t feel the need to buy a large public building with ATMs and cashiers and toxic loans on its books and all that, because I can go down the road 10 minutes, and there’s one I bought already.

Of course, unlike the Bots [Dublinese for the Botanical Gardens, which Bertin Ahearn famously said he felt, as a taxpayer, that he ‘owned’], the banks are not open on Sunday afternoon. And I don’t want to visit them on Sundays, necessarily. But now that I own them, I’d like the management to work all weekend anyway, just for the hell of it. All this power is intoxicating.”

The aphrodisiac effect of power

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This morning’s Observer column…

Once upon a time, the ultimate put-down to a bright spark was to say, ‘well, if you’re so smart, how come you’re not so rich?’. Wall Street Crash 2.0 has rather undermined this ploy, by making it clear that an awful lot of very rich folks were anything but smart. It turns out that we were unduly dazzled by the Masters of the Universe, but we had to wait until they had vaporised the US economy before getting wise to the fact.

Actually, this was just a special case of a more general human weakness – our tendency to lose all capacity for critical thought when confronted by great wealth or power. This ‘aphrodisiac effect’ seems to be ubiquitous. One saw it, for example, in the way leggy females used to throw themselves at Henry Kissinger, a stumpy troglodyte who just happened to be US Secretary of State. And we see it in the way even hardened hacks go weak when offered an audience with Bill Gates, Warren Buffett or even, God help us, Steve Ballmer, chief of Microsoft…